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Professor Bainbridge on Executive Compensation under Delaware Corporate Law: A ProfessorBainbridge.com Video

What course would you teach using my Advanced Corporation Law casebook?

A friend emailed to say she liked my new casebook on Advanced Corporation Law. But when I wrote back to encourage her to adopt it, she expressed doubt as to what course she would use it in.

A fair question. I use it in a course at UCLA called Advanced Corporation Law.

Reflections on being a Corporate Lawyer

A video from my new YouTube playlist on corporate law.

Professor Bainbridge on Corporate Law: Videos

I've created a playlist on Youtube of my videos on corporate law. You can access it here.

In the Corporate Social Responsibility Debate, do Fiduciary Duties Matter?

An interesting new paper argues that the answer to the titular question is no:

This paper provides a crucial corrective to the “corporate social responsibility” debate, which concerns whether corporations have the obligation to protect or serve the interests of groups other than their shareholders, like employees or customers (often called “stakeholders”). Scholars on one side of the debate have repeatedly presumed that corporate directors’ fiduciary duties to shareholders play an important role in protecting shareholders from decisions that favor stakeholders at their expense. Scholars on the other side agree that fiduciary duties provide meaningful protection against unfavorable conduct, but argue that directors should also owe fiduciary duties to stakeholders so they may be similarly protected. I argue this shared premise is empirically mistaken: fiduciary duties in practice play almost no role in director decisions to favor one corporate group over another. I first explain that courts and scholars rarely note the difference between two distinct definitions of the duty of loyalty—one broad, one narrow—and argue that only the broader definition would allow this duty to have any impact on directors’ distribution of corporate resources. Under this narrow definition, fiduciary duties to shareholders prevent directors from acting in their own self-interest, but not from acting in the interests of stakeholders at shareholders' expense. I then argue that Delaware law enforces only the narrower definition of loyalty due to the triggering conditions of the judicial standards of review, which largely eliminates shareholders’ ability to protect themselves from directors’ decisions that favor stakeholders. Finally, given this is true for shareholders, I argue it would likewise be true for employees (or any stakeholders), were they to be owed fiduciary duties by directors. Because fiduciary duties do not protect against such unfavorable conduct, I conclude it is a mistake to debate to whom directors should owe fiduciary duties. Advocates for shareholder or stakeholder protection should therefore focus on other mechanisms to obtain it.

Povilonis, Jonathan, The Use and Misuse of Fiduciary Duties: Why Corporate Fiduciary Duties Aren’t Worth Fighting For (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3752756or http://dx.doi.org/10.2139/ssrn.3752756

I particularly liked the discussion at pp. 39ff of my argument that "while Delaware law does not strictly enforce the Exclusive Benefit norm in every case, this is merely 'an unintended consequence of the business judgment rule.'" This is a point that a lot of folks on the CSR/ESG side of the debate often overlook or fail to grasp. Mr. Povilonis acknowledges the argument and gives it a fair description, but then spins the perspective to examine "not what directors can do but what shareholders have the power to prevent them from doing." Where we differ, however, is highlighted by his argument that:

To be clear, I don’t dispute that the standard of conduct for Delaware directors is that they must act for the exclusive benefit of shareholders—that is, the broad principle of loyalty I have been calling Exclusive Benefit. My point is that the standard of review by which Delaware courts evaluate directors’ stakeholder-interested conduct is so deferential that it virtually eliminates shareholders’ ability to hold them to that standard by suing for breaches of fiduciary duty. ...

... under current Delaware law, this deference virtually eliminates shareholders' ability to prevent directors' apparent stakeholder-interested conduct by suing for breaches of fiduciary duty.

But the same deference is a feature of Delaware law with respect to virtually all board decisions, other than those few decisions subject to review under enhanced scrutiny or the duty of loyalty. That deference is a core part of the board-centric system of governance established by Delaware law. The business judgment rule thus functions as an abstention doctrine, which obliges courts to abstain from reviewing almost all director decisions whether motivated by concern for stakeholders or not. See Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 Vanderbilt Law Review 83 (2019), available at: https://scholarship.law.vanderbilt.edu/vlr/vol57/iss1/3. 

My point is that director decisions motivated by concern for stakeholders differ neither in kind nor degree from almost all other board decisions. Put another way, the fact that judicial "deference virtually eliminates shareholders' ability to prevent directors' apparent stakeholder-interested conduct by suing for breaches of fiduciary duty" is of far less interest than the fact that "deference virtually eliminates shareholders' ability to [hold directors accountable for their] conduct by suing for breaches of fiduciary duty"

My Pillow, Inc. and the perennial question of whether Caremark claims should lie when boards fail to monitor the CEO's personal life

The WSJ reports that:

One of the largest makers of voting machines in the U.S. on Monday sued a prominent supporter of former President Donald Trump, alleging that the businessman had defamed the company with false accusations that it had rigged the 2020 election for President Biden.

Dominion Voting Systems sued Mike Lindell, chief executive of Minnesota-based MyPillow Inc., and his company in the U.S. District Court for the District of Columbia, seeking more than $1.3 billion in damages.

In its complaint, the company cites a number of statements made by Mr. Lindell, including in media appearances, social-media posts, and a two-hour film claiming to prove widespread election fraud.

I'm not sure whether My Pillow has minority shareholders or an independent board, but let's assume that it at least has some minority shareholders. If so, could those shareholders bring a Caremark claim against the board for failing to monitor CEO Lindell's political activities.

Directors are not expected to know, in minute detail, everything that happens on a day-to-day basis. Instead, a director is expected to have a rudimentary understanding of the firm’s business and how it works, keep informed about the firm’s activities, engage in a general monitoring of corporate affairs, attend board meetings regularly, and routinely review financial statements.[1] Beyond these obligations, the question remained as to whether boards have an obligation to monitor proactively the conduct of corporate subordinates.

In Caremark Int’l Inc. Deriv. Litig.,[2] Delaware Chancellor Allen opined that a board of directors in fact has an obligation proactively to take affirmative compliance measures:

[I]t would, in my opinion, be a mistake to conclude that our Supreme Court’s statement in Grahamconcerning “espionage” means that corporate boards may satisfy their obligation to be reasonably informed concerning the corporation, without assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation’s compliance with law and its business performance. . . .

Thus, I am of the view that a director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.

Even though Caremark was dicta and arguably inconsistent with supreme court precedent, it quickly became well accepted by the chancery court as good law.[3] Yet, for over a decade, the Delaware Supreme Court found no occasion on which to address squarely Caremark’s validity.

In Stone v. Ritter,[4] the Delaware Supreme Court confirmed that “Caremark articulates the necessary conditions for assessing director oversight liability.” In doing so, however, the court described Caremark as a case in which the operative standards are good faith and loyalty rather than care, stating that:

[T]he Caremark standard for so-called “oversight” liability draws heavily upon the concept of director failure to act in good faith. That is consistent with the definition(s) of bad faith recently approved by this Court in its recent Disney decision, where we held that a failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence). In Disney, we identified the following examples of conduct that would establish a failure to act in good faith: . . . where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.

The Court further explained that such an intentional failure “describes, and is fully consistent with, the lack of good faith conduct that the Caremark court held was a ‘necessary condition’ for director oversight liability, i.e., a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists.”

As a practical matter, liability under Caremark and Stone has been most common where the board completely ignored compliance issues with respects to aspects of the business that are central to the company’s operations. Perhaps the closest case to My Pillow was posed in Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart,[5] involving Martha Stewart’s alleged insider trading:

Defendant Martha Stewart (“Stewart”) is a director of the company and its founder, chairman, chief executive officer, and by far its majority shareholder. . . . Stewart, a former stockbroker, has in the past twenty years become a household icon, known for her advice and expertise on virtually all aspects of cooking, decorating, entertaining, and household affairs generally.

The market for [Martha Stewart Living Omnimedia, Inc. (“MSO”)] products is uniquely tied to the personal image and reputation of its founder, Stewart. MSO retains “an exclusive, worldwide, perpetual royalty-free license to use [Stewart’s] name, likeness, image, voice and signature for its products and services.” In its initial public offering prospectus, MSO recognized that impairment of Stewart’s services to the company, including the tarnishing of her public reputation, would have a material adverse effect on its business. . . . In fact, under the terms of her employment agreement, Stewart may be terminated for gross misconduct or felony conviction that results in harm to MSO’s business or reputation but is permitted discretion over the management of her personal, financial, and legal affairs to the extent that Stewart’s management of her own life does not compromise her ability to serve the company.

Stewart’s alleged misadventures with ImClone arise in part out of a longstanding personal friendship with Samuel D. Waksal (“Waksal”). Waksal is the former chief executive officer of ImClone. . . . Waksal and Stewart have provided one another with reciprocal investment advice and assistance, and they share a stockbroker, Peter E. Bacanovic (“Bacanovic”) of Merrill Lynch. . . . The speculative value of ImClone stock was tied quite directly to the likely success of its application for FDA approval to market the cancer treatment drug Erbitux. On December 26, Waksal received information that the FDA was rejecting the application to market Erbitux. The following day, December 27, he tried to sell his own shares and tipped his father and daughter to do the same. Stewart also sold her shares on December 27. . . . After the close of trading on December 28, ImClone publicly announced the rejection of its application to market Erbitux. The following day the trading price closed slightly more than 20% lower than the closing price on the date that Stewart had sold her shares. By mid-2002, this convergence of events had attracted the interest of the New York Times and other news agencies, federal prosecutors, and a committee of the United States House of Representatives. Stewart’s publicized attempts to quell any suspicion were ineffective at best because they were undermined by additional information as it came to light and by the other parties’ accounts of the events. Ultimately Stewart’s prompt efforts to turn away unwanted media and investigative attention failed. Stewart eventually had to discontinue her regular guest appearances on CBS’ The Early Show because of questioning during the show about her sale of ImClone shares. After barely two months of such adverse publicity, MSO’s stock price had declined by slightly more than 65%. In August 2002, James Follo, MSO’s chief financial officer, cited uncertainty stemming from the investigation of Stewart in response to questions about earnings prospects in the future. . . .

Count II of the amended complaint alleges that the director defendants and defendant Patrick breached their fiduciary duties by failing to ensure that Stewart would not conduct her personal, financial, and legal affairs in a manner that would harm the Company, its intellectual property, or its business.[6]

The court held that:

First, plaintiff does not allege facts that would give MSO's Board any reason to monitor Stewart's activities before mid–2002 when the allegations regarding her divestment of ImClone stock became public. Second, the quoted statement from Graham refers to wrongdoing by the corporation. Regardless of Stewart's importance to MSO, she is not the corporation. And it is unreasonable to impose a duty upon the Board to monitor Stewart's personal affairs because such a requirement is neither legitimate nor feasible. Monitoring Stewart by, for example, hiring a private detective to monitor her behavior is more likely to generate liability to Stewart under some tort theory than to protect the Company from a decline in its stock price as a result of harm to Stewart's public image.

Even if I accept that the board knew that Stewart's personal actions could result in harm to MSO, it seems patently unreasonable to expect the Board, as an exercise of its supervision of the Company, to preemptively thwart a personal call from Stewart to her stockbroker or to fully control her handling of the media attention that followed as a result of her personal actions, especially where her statements touched on matters that could subject Stewart to criminal charges. Plaintiff has not cited any case to support this new “duty” to monitor personal affairs. Since the defendant directors had no duty to monitor Stewart's personal actions, plaintiff's allegation that the directors breached their duty of loyalty by failing to monitor Stewart because they were “beholden” to her is irrelevant. Count II is dismissed for failure to state a claim.[7]

In a subsequent opinion, the Delaware Chancery Court again held that “directors of Delaware corporations generally have no duty to monitor the personal affairs of other directors and officers.[8]

Some observers, however, have raised the question of whether subsequent social and legal developments make it increasingly likely that private misconduct by executives will lead to viable Caremarkclaims. In a post-#MeToo article, however, Tom Lin argued that Caremark oversight duties continue to “present difficult issues concerning the monitoring of executive private behavior.”[9] He explained:

First, because of the high bar for attaching liability pursuant to a director's Caremark duties, directors bear little risk for not aggressively monitoring the private affairs of their fellow executives. Even if such matters are subject to some oversight, reasonable attempts that do not “utterly” or “consciously” fail is all that the law requires of directors. In fact, the court in Caremark stated that these types of cases may “possibly [represent] the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” As such, companies have not bolstered their compliance and oversight of executive private conduct as much as they have in other corporate areas because there is little risk of liability and there remain open questions about whether the executive private matters should even be subject to corporate monitoring.

Second, creating and sustaining systems to oversee executive private conduct may be highly undesirable and impractical. After all, which senior executive is happy to subject themselves to being monitored by their fellow executives? Furthermore, it would be difficult to establish a surveillance system for senior executives concerning their private conduct, given the wide range of private travel and behaviors. This is to say nothing of the norms of collegiality, privacy, and legality that may be breached as a result of such a corporate surveillance system.[10]

Morris James' Delaware Corporate and Commercial Cases of 2020 in Review

Morris James offers a top 10 list of 2020 Delaware cases in corporate and commercial law, including a few personal favorites:

• AmerisourceBergen Corp. v. Lebanon Cty. Employees’ Ret. Fund, __ A.3d __, 2020 WL 7266362 (Del. Dec. 10, 2020) (Traynor, Justice)  

  •   I think this one goes in the casebook

• In re Dell Tech. Inc. Class V S’holders Litig., 2020 WL 3096748 (Del. Ch. Jun. 11, 2020) (Laster, Vice Chancellor)

  •  Probably not for the BA casebook, but possibly for the M&A casebook

• In re Anthem-Cigna Merger Litigation, 2020 WL 5106556 (Del. Ch. Aug. 31, 2020) (Laster, Vice Chancellor)

  • I'd love to include this opinion on efforts clauses, a topic of longstanding personal interest, but VC Laster brought the opinion in at 300 pages! How am I suppose to edit that down to something manageable?

Langevoort and Sale on "Corporate Adolescence" and WeWork: Recommended Reading

Don Langevoort and Hillary Sale are two of my favorite people and corporate law scholars. they've published a very interesting new paper, which uses WeWork as a case study in how corporate governance works (or, more precisely. does not work) in the startup setting:

This article explores a series of rent-seeking behaviors and fiduciary deficits that are playing a role in the “growth” and demise of U.S. companies. Start-up financing occurs through exemptions that remove disclosure obligations required in public markets, assuming that private ordering suffices. The exemptive-privilege premise is that parties to financing rounds will be faithful agents, i.e., fiduciaries, to their sources of capital. Where there are conflicts of interest, fiduciary deficits will arise unless either the threat of litigation for breaches of duty sufficiently deters the resulting opportunism or the sources of capital are themselves sufficiently watchful and savvy to combat the opportunism. As private capital sources become more numerous and diverse, the latter may not happen so reliably.

We examine this territory through a business-school like case study of WeWork, one of the most recent examples of failed private ordering and one where the prescribed corporate governance mechanisms failed to fill the gaps. WeWork’s extraordinary growth over eight rounds of financing both strengthened the hand of its CEO, Adam Neumann and concealed danger signs. Indeed, in the absence of required disclosure, fiduciary duties take on extra significance. Yet, the WeWork board exhibited multiple fiduciary deficits resulting in what is a cautionary story about governance failure and a warning to those who are focused on expanding “access” to these funding rounds

In short, the funding and governance systems are not designed for long-term “startup” governance, and WeWork reveals the systemic slack and flaws. Our exploration of the motivations, incentives and opportunities in start-up financing reveals an accumulating set of deficits that makes the current state of affairs more problematic than the conventional account would suggest. From founder control enabling self-centered, biased and risky behaviors, to funders with diverse incentives and capital sources, to start-up market “valuations” issues, the result is failed information-forcing systems and governance safeguards and directors who focus on constituent protections and not on their fiduciary duties.

Langevoort, Donald C. and Sale, Hillary A., Corporate Adolescence: Why Did 'We' not Work? (January 8, 2021). Available at SSRN: https://ssrn.com/abstract=3762718 or http://dx.doi.org/10.2139/ssrn.3762718

A Mind Map of Piercing the Corporate Veil

You can download a better copy here

Delaware Vice Chancellor Laster cites yours truly

In Firefighters' Pension System of the City of Kansas City v. Presidio, Inc., CV 2019-0839-JTL, 2021 WL 298141, at *29 n.13 (Del. Ch. Jan. 29, 2021), Vice Chancellor Laster cited my article, Stephen M. Bainbridge, Unocal at 20: Director Primacy in Corporate Takeovers, 31 Del J. Corp. L. 769, 788–89 (2006), in a long string cite about how mergers involve final period problems. 

Later in the opinion (at *49 n.28) he cites, Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 Nw. U.L. Rev. 547, 605 (2003), for the proposition that directors are not agents of the shareholders.

Lund and Pollman on The Corporate Governance Machine

I had the privilege of reading this article when it was in a draft stage. It was excellent then and a fast look suggests that this version is even better.

The conventional view of corporate governance is that it is a neutral set of processes and practices that govern how a company is managed. We demonstrate that this view is profoundly mistaken: in the United States, corporate governance has become a “system” composed of an array of institutional players, with a powerful shareholderist orientation. Our original account of this “corporate governance machine” generates insights about the past, present, and future of corporate governance. As for the past, we show how the concept of corporate governance developed alongside the shareholder primacy movement. This relationship is reflected in the common refrain of “good governance” that pervades contemporary discourse and the maturation of corporate governance as an industry oriented toward serving shareholders and their interests. As for the present, our analysis explains why the corporate social responsibility movement transformed into shareholder value-oriented ESG, stakeholder capitalism became relegated to a new separate form of entity known as the benefit corporation, and public company boards of directors became homogenized across industries. As for the future, our analysis suggests that absent a major paradigm shift, advocacy pushing corporations to consider the interests of employees, communities, and the environment will likely fail if such effort is not framed as advancing shareholder interests.

Lund, Dorothy S. and Pollman, Elizabeth, The Corporate Governance Machine (January 28, 2021). U of Penn, Inst for Law & Econ Research Paper No. 21-05, Available at SSRN: https://ssrn.com/abstract=3775846

Recommended Reading

UCLAW's Jim Park on "From Managers to Markets: Valuation and the Shareholder Wealth Paradigm"

Interesting new paper from my friend and UCLAW colleague James Park:

The shareholder wealth paradigm displaced a managerialist model where investors deferred to managers with the expertise to efficiently allocate resources within the firm. The corporate managers who administered such internal capital markets faced less pressure to generate profits than they do today. The conventional explanation of the transition from managerialism to shareholder wealth maximization points to changes in ideology favoring shareholders. This Article argues that a more significant cause of the decline of the managerialist model was a fundamental shift in the way that investors value companies. As managerial skill improved, companies with strong management teams were viewed as more likely to generate earnings over time. Participants in external capital markets became more confident in forecasting earnings for companies with superior management and stock prices for companies increasingly reflected the present value of the company’s earnings potential. As investors focused on projecting future performance, it became important for managers to signal their ability to produce earnings by consistently meeting market projections of such performance. Rather than ideology, the need to demonstrate earnings potential is the primary reason why public companies generally prioritize shareholder wealth maximization. If the transition to shareholder wealth maximization was driven by changes in valuation, it is possible that shifts in valuation methods could result in a world in which shareholder wealth maximization plays a lesser role in shaping corporate purpose.

Park, James J., From Managers to Markets: Valuation and the Shareholder Wealth Paradigm (November 15, 2020). UCLA School of Law, Law-Econ Research Paper No. 20-09, Available at SSRN: https://ssrn.com/abstract=3731764

Is Caremark evolving and, if so, to what?

Very interesting new paper by Roy Shapira:

What role does corporate law play in holding directors accountable for compliance failures? Until recently, the answer has been “very little.” The prevalent standard for director oversight duties (Caremark duties) was set high, effectively demanding that plaintiffs show scienter without having access to discovery. As a result, derivative actions over directors’ failure of oversight were routinely dismissed at the pleading stage, and many commentators considered Caremark duties largely irrelevant. Yet, starting in June 2019, a string of successful Caremark cases have signaled a new era of enhanced oversight duties. This Article contributes to our understanding of the new Caremark era along three dimensions. First, the Article delineates the contours of the shift in Delaware courts’ approach to oversight duties. The courts now increasingly apply the “mission critical compliance” exception to justify enhanced duties, and lower the threshold for receiving information in order to investigate potential failure-of-oversight claims. Second, the Article identifies the drivers of this “new Caremark era,” with special emphasis on the role of a seemingly disparate development in shareholders’ right to information from the company. Shareholders now enjoy much better pre-filing discovery powers, which they can utilize to plead with particularity facts about how the board never even discussed a critical compliance issue, or how they knew about critical problems but chose to ignore them. Armed with these newfound pre-filing investigatory tools, shareholders can overcome what once seemed insuperable pleading hurdles. Finally, the Article evaluates the desirability of the new Caremark era, spotlighting its likely positive effects on information flows inside companies and the ability of the market to discipline corporate misbehavior (better reputational discipline), as well as the ways in which it nicely compensates for the blind spots of other enforcement mechanisms.

Shapira, Roy, A New Caremark Era: Causes and Consequences (December 10, 2020). 98 Washington University Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3732838

I remain hopeful that Caremark liability will not become routine, for the reasons I articulated in Caremark and Enterprise Risk Management, 34 Journal of Corporation Law 967 (2009), and The Convergence of Good Faith and Oversight, 55 UCLA Law Review 559 (2008) (Coauthors: Star Lopez and Benjamin Oklan). But I think Professor Shapira's analysis may well be right as a descriptive matter.

I blame Leo Strine (in the friendliest possible way). His opinion in Guttman v. Huang recharacterized Caremark as a duty of loyalty case instead of a day of care case. Once the Delaware Supreme Court swallowed that in Stone v. Ritter we faced the potential of a slippery slope in which Caremark could go from being the hardest corporate law claim to prove to a potentially crippling source of liability.

Yours truly on the Federalization of Corporate Law from a 2009 Federalist Society Program

Public corporations, the public interest, concession theory, and limited liability

Is a private corporation somehow vested with a public interest? Do the facts that formation of a corporation requires a (purely ministerial) state act, that the state provides a set of off the rack rules for corporate governance in its business corporation law, and that that law provides both affirmative and defensive asset partitioning via the rules on limited liability and private creditor access to firm assets make the corporation somehow uniquely subject to regulation in the public interest?

To be sure, some scholars have argued that incorporation—and, in particular, limited liability—is a privilege granted by society that can be revoked at will.[1] This is the once widely shared “concession theory,” pursuant to which the corporation was regarded as a quasi-state actor exercising powers delegated by the state.[2] But it has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously.^[3] See, e.g., Citizens United v. Fed. Election Commn., 558 U.S. 310, 432 (2010) (Stevens, J., concurring in part) (noting that "many legal scholars have long since rejected the concession theory of the corporation").

I note in passing that concession theory is especially problematic for those of us who accept the contractarian model of the firm, because our preferred understanding of the corporation treats corporate law as nothing more than a set of standard form contract terms provided by the state to facilitate private ordering.

Todd Henderson (Chicago Law) and I tackled concession theory as it relates to limited liability in our book Limited Liability: A Legal and Economic Analysis. In it, we explained that:

The notion that the purported privilege of limited liability amounts to a social subsidy in return for which society may demand certain forms of corporate behavior is also flawed. Limited liability is properly regarded as a subsidy only if it constitutes a wealth transfer from one segment of society to another. As Professor Herbert Hovenkamp concludes, however, “[i]t is hard to make such a showing about limited liability.”^[4] To the contrary, society benefits in a variety of ways from limited liability.[5]

In addition, limited liability could be created by contract, at least among the creditors that bargain with the firm. As applied to these creditors—for example, banks, trade creditors, employees, and government agencies—the concession theory makes little sense. In the absence of a limited liability rule, one could be created by contract for them. Nor does it make much more sense for tort creditors. Although tort creditors cannot literally bargain before they are injured, for the reasons discussed in this section, it is likely that the hypothetical bargain they would strike if they could would be limited liability. Of course, after one is injured in a tort, one strictly prefers shareholder unlimited liability. But this is also true for contract creditors! The relevant time of the hypothetical bargain inquiry is before the tort happens. And, at this time, the question is not whether the firm should pay or not, but rather which party is the most efficient bearer of risk. The firm can provide insurance to the victim for the tort, but the party can buy first-party insurance directly from an insurance company, and the government (through the social safety net) can also provide insurance. Once the tort system is seen merely as a way of providing insurance, then the question becomes which of these can provide the lowest cost insurance with the best incentive effects. When answering this question, one must take into consideration both the relative incentive effects the choice will have on the parties, but also the costs of obtaining a judgment or settlement of the claim, including error costs. So, for instance, if obtaining a judgment in litigation is more expensive and more uncertain than obtaining the same relief from an insurance company, net of fees paid, then the latter may be preferable. This is especially true if under prevailing legal standards companies can avoid paying (that is, being pierced) by doing things (such as dotting the I’s and crossing the T’s) that do not materially reduce the risk of harm to potential tort victims.